April 20th, 2016
How to Bid Correctly at an Auction: Your Top 5 Ways to Bid and Not Over Pay
“Auctions are full of manipulators. The only way to get your price is to determine in advance the highest bid you will make and never go above it--ever.”
Have you ever been intimidated, confused, anxious, or boondoggled at a real estate auction? Sooner or later, if you are serious about making money in real estate, you’ll get excited about the auction process and the deals or steals available will wet your appetite. After you’ve located a property that fits your criteria, you’ll attend the auction and try to purchase the property with the highest bid—your bid. Here are five ways to bid correctly at an auction and not over pay.
(1) Know your market well. Knowing your market well is critically important. The number one reason people overpay at auctions it that they do not truly know their target market thoroughly enough to access an accurate price on the property being bid for. If the property you want to bid on is a three bedroom, two bath house, you better know what a three bedroom two bath house is going for in your neighborhood. If it’s a four bedroom—know what a four bedroom goes for.
(2) Liens and other encumbrances. Courthouse auctioned properties do not come with a clean title. You’ve got to check the recorders records of liens, taxes and judgments attached to the property. Sometimes it is hard to locate these encumbrances.
We (Brother John and I) purchased a property several years ago at a courthouse auction for $52,000. We paid cash, same day as required. We did our normal searches and found the property unencumbered. To our shock, about a week later we received a letter from the city saying we owed $320,000 on a code enforcement fine that had been running for over two years. The previous owner had a tough time with local code enforcement. We were either going to get this reduced to zero, zilch, or we were going to loose $52,000. The property was a fixer-upper and was not worth more than $100,000 as it stood. After explaining our case and how we planned to fix up and beautify the property, the lien was dismissed. But if it hadn’t been, I would have never bought another property at a courthouse auction and I would have ended up suing the city for fraud or something, since the code enforcement lien was hidden from public record, so we thought. Eventually, the property was fixed, rented and flipped a year and a half later for somewhere in the neighborhood or $190,000. Fix-up costs was about $10,000, showing us a healthy profit in the end.
(3) Set a price. Again, knowing your market well will give you the knowledge to set a firm price you’ll want to pay for the property. After you’ve figured out the fix-up costs and recording fees, auctioneer’s premium, and other fees, you’ll have to know the “after repair value” of the property. After you know the post-rehab value, then you can set a price for what you’ll pay for the property.
For example, many times a house that may need some rehab will sell for about a third of its fixed up value. Here’s the rundown: You find a house at the auction you like. Fully rehabbed homes in the area are selling for $150,000. You estimate a fix up costs at $20,000. A third of $150,000 is $50,000. With $20,000 allocated to fix up, you’ll be in for $70,000 after everything is said and done. This gives you plenty of room to work with. Remember, most of the properties you bid on at the courthouse, the ones the banks do not want, are junked properties and some may need serious fix up to them.
(4) Know the premiums. Before you make a bid, you should know all the premiums you’ll be paying. A 10% premium is standard in many private auctions; for example, if you are the willing bidder on a house for $50,000, an additional 10 percent or $5,000 is added to the price. The $5,000 is the auctioneer’s fee. Recording and stamp fees could also add up to 1% to 1.5% on average, and there may also be other fees and premiums involved.
(5) Watch the action first. Never be the first one to bid at an auction. Watch the action first and always wait for the last moment to raise your paddle or call out the number of your offer. Sometimes property gets bid up quickly by uninformed and inexperienced investors. And sometimes in certain local courthouse auctions, a handful of speculators who regularly attend and bid on property raise prices by bidding up properties, and then dropping out, leaving the inexperienced buyer with a property that had been overbid, and is now overvalued. This is done so the new investor is dismayed at the whole process and never attends another auction.
Not all properties offered at an auction are worth your while. It’s important to set your objectives and stick to them. Never forget the reason why you are buying—you are an investor and buying property correctly takes intelligent, dedicated work. And it is a process few investors master. But it is away of acquiring investment property for good prices and it can be mastered with intelligent effort and a clear objective. Follow the steps outlined above and you’ll find yourself on the better end to profits. Do your homework and know the market for the type of property you will be bidding on; know your market well, the fix-up costs and the eventual resale price.
Auctions are but one way to find bargain properties. I am working on a new book titled How to Buy Real Estate for 25% Below Market. Release date is mid summer. To learn more on flipping houses get your copy of The Millionaire Real Estate Flippers. Visit www.FlippingBrothers.com